The man who got Sigma’s chemistry right

It took
Mark Hooper
only a few minutes to say “yes" when his mobile phone rang with the offer of the top job at
Sigma Pharmaceuticals
one afternoon in April 2010.

Hooper had just spent “the worst year of my life" as the chief financial officer at paper merchant
PaperlinX
and the thought of being able to go back to Sigma to take the job he had coveted for most of his five-year tenure at the drug distributor appealed instantly.

“It was hard to know if there was anyone else in the frame," says the silver-haired 53-year-old. “But within a week we had agreed around the principles of me coming back. I sat down with then chairman
John Stocker
and current chairman
Brian Jamieson
for an interview. And then contract details were finalised and it was announced to the market."

In the past 18 months, Hooper has reshaped Sigma, sold its distressed generic drug manufacturing operations to South Africa’s Aspen Pharmacare in a $900 million deal, cut costs, tightened inventory and reined in working capital.

After two years of hefty losses, Sigma posted a $26.7 million net profit in the first half of 2012. Underlying earnings before interest and tax of $35 million beat some analysts’ estimates. The stock, although a far cry from its five-year high of $2.87, has climbed 38 per cent over the past 12 months to 60.5¢.

Hooper says it was a difficult three months between announcing his departure as CFO of the troubled PaperlinX and stepping up to the CEO role at Sigma, which seemed just as troubled.

“It was hard because I was CEO in waiting and there is nothing I could do," he says. “I sort of had to manage that from a distance. It was possible that Aspen might have proceeded with a full takeover of the business."

Hooper started his career at BHP Billiton and spent 20 years in the resources sector before trading diamonds for jelly beans, joining Sigma where he was CFO from 2001 to 2006.

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He says he left Ashton Mining when Rio Tinto bought the business because he didn’t want to get “typecast as a resources guy forever".

Hooper took over from Elmo De Alwis in September 2010, working hard to get the company back on track as it wavered under a $900 million-odd debt and breached its covenants. He felt Sigma was a business he could try to fix.

“I felt like I knew the business," he says. “On one hand I worked there before but the fact that I had not been in the business for a while gave me an advantage to see what was wrong from the outside."

It has not been an easy road given two major challenges: spending cuts to the Pharmaceutical Benefits Scheme (PBS) and US giant Pfizer’s decision to sell direct to pharmacies, bypassing wholesalers such as Sigma and
Australian Pharmaceutical Industries
.

The federal government has been trying to cut its PBS costs since 2007. The reforms are aimed at cutting the government’s costs by lowering the amount that it reimburses for generic drugs. It is estimated that of the $9 billion PBS, about a third of all scripts will be affected by the 23 per cent price cut to generic drugs from April 1. About 70 per cent of Sigma's sales are PBS products.

“The PBS reforms were designed to deliver at least 23 per cent savings to the government but the government looks like it will get significantly more savings than they anticipated," Hooper says.

Simga will cut back again on discounts given to pharmacies, says Hooper. He says there is no need for the government to implement further PBS reforms or it might start to restrict generic drug availability.

The move by Pfizer, which has the world’s biggest-selling drug, the cholesterol-lowering Lipitor, to distribute its own products rather than contract companies such as Sigma to do it, cost Sigma 10 per cent to 15 per cent of its wholesale sales base. However, Hooper says he does not think other drug manufactures will follow Pfizer’s direct model.

Deutsche Bank analyst David Low upgraded the stock to a “buy" in September, noting Hooper’s strong track record for delivering results. “This has continued since he took over at Sigma, with the new management team under Mark turning around a struggling business in a difficult environment due to the highly disruptive exit of Pfizer from the wholesale channel," Low says. “Mark has subsequently outlined clear return-on-invested-capital targets which we are confident will be delivered over the next few years."

Sigma’s return on invested capital has doubled in 18 months to around 13 per cent, in part through stripping out capital invested in the business.

In January 2010 Sigma had $668 million of working capital deployed and by July 2011 Hooper had whittled it down to $522 million by reducing creditor days from 90 to 72. While the balance sheet is in better shape, there’s more work to be done.

Hooper is putting more resources in the retail business which houses the Amcal and Guardian pharmacy network of nearly 500 stores. He says the business has been neglected over the years. “Retail has become much more important to what we can offer the pharmacy. We are reinvesting in private label, which I think is a real opportunity," he says.

Hooper swims five kilometres a week and says exercise keeps him balanced – particularly when things get tough at work.

He also relaxes by watching his beloved Collingwood Magpies in the AFL. “It’s one of the great things in life to go to a football game and scream your lungs out," he says.